Deck 16: The Art and Science of Pricing to Optimize Revenue

Question 1

Which of the following statements is correct regarding the relationship between a product's cost, price, and profit?

A) Price a product too low, customers will always purchase a product because the price is lower than the competitor.
B) Price a product too high, customers will most likely continue to buy if they have purchased the product in the past.
C) Price a product too high or too low can result in lost sales to competitors.
D) There is no direct correlation between a product's cost, price and profit since a company can charge whatever it desires for a product.

Answer 1

Price a product too high or too low can result in lost sales to competitors.

Question 2

The point at which the number of units supplied intersects with the number of units demanded is called the

A) break-even point.
B) equilibrium point.
C) optimum capacity point.
D) preferred performance point.

Answer 2

equilibrium point.

Question 3

Price takers

A) must accept the prevailing market price and sell each unit at that given price.
B) are found in non-competitive markets.
C) have the power to influence the market price.
D) enjoy pricing power since they can set their own product prices.

Answer 3

must accept the prevailing market price and sell each unit at that given price.

Question 4

Companies that have the power to influence the market price, and thus, enjoy pricing power are referred to as price

A) takers.
B) gougers.
C) makers.
D) analysts.

Question 5

Which of the following are found in competitive markets?

A) Price makers
B) Price takers
C) Market makers
D) Speculative takers

Question 6

The primary decision to sell a product or service is whether a firm

A) can control the costs associated with the product/service being provided.
B) has significant competition in the market for the specific product/service.
C) can afford to produce or provide the product/service.
D) can sell the product/service at a profit.

Question 7

Which of the following is not a characteristic of price takers?

A) Customers see little difference in the product/service being offered with other firms.
B) Customers see real or perceived differentiated quality/innovation in the product or service.
C) Product/service costs must be carefully controlled by the provider since the price cannot be adjusted easily.
D) Much competition exists in the market for comparable products/services with each firm working toward being a market leader.

Question 8

Which of the following is a characteristic of price makers?

A) Customers see real or perceived differentiated quality/innovation in the product/service.
B) Firms must carefully control costs of the product/services since the price cannot be easily adjusted.
C) Competition exists in the market for comparable product/service with firms striving for market leadership.
D) Customers see little differentiation in the product/service being offered.

Question 9

Which of the following statements is correct regarding price, products, and competitors?

A) A product or service only has to appeal to the customer in terms of price, not in terms of quality or characteristics.
B) It is only necessary to know pricing and product strategies, and not competitor strategies.
C) It is important to know not only pricing and product strategies, but also to know your competitors' strategies for controlling costs and knowing customers.
D) If a product is priced too low, sales will increase dramatically.

Question 10

Magnum Beverages sells it premium champagne at $55 per bottle. It current costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month. If Magnum produced and sold 100 bottles of champagne last month, has the company adequately priced each bottle of champagne to make a positive monthly operating income?

A) Yes, since the revenues from the sales exceeds the total costs incurred.
B) No, because the revenues from the sales just equals the total costs incurred.
C) No, because the revenues from the sales is less than the total costs incurred.
D) This cannot be determined due to lack of sufficient information.

Question 11

Magnum Beverages sells bottles of premium champagne. It currently costs $40 per bottle to produce each bottle of champagne. Magnum has overhead costs of $1,800 per month, and expects to incur this amount each month. Magnum produced and sold 100 bottles of champagne last month and expects to continue this production and sales pattern for the rest of this current year. Its closest competitor currently sells its bottles of champagne at $65 per bottle. What is the lowest price that Magnum could sell each bottle of champagne for and to make a monthly operating profit?

A) $55.01
B) $58.01
C) $65.00
D) $68.00

Question 12

Which of the following would not affect the determination of the price of a product or service?

A) Supply and demand
B) Competition
C) Product or service costs
D) Market share

Question 13

You are presented with the following three scenarios for Sing Company: With regards to Sing's price, cost, and product, what can be concluded from Scenario 2?

A) Sing Company has a profit because it is not charging a high enough price to cover the costs incurred.
B) Sing Company should have incurred a loss because its sales in units are lower in this scenario than any other option.
C) Sing Company can make a profit by increasing its unit selling price, but the unit sales are normally going to decrease, and may result in the company being driven out of the market due to competitors having lower unit selling prices.
D) Sing Company can raise its price to become profitable without having to worry about unit sales declining or other competitors with lower selling prices driving it out of the market.

Question 14

You are presented with the following three scenarios for Yeng Company: With regards to Yeng's price, cost, and product, what can be concluded from Scenario #1?

A) Yeng Company has incurred a loss because it is not charging a high enough price to cover the costs incurred.
B) Yeng Company has incurred a loss because its sales in units are lower and cannot cover its costs incurred.
C) Yeng Company could make a profit if it produces and sells three more products.
D) Yeng Company can raise its price to become profitable without having to worry about other competitors with lower selling prices driving it out of the market.

Question 15

Why is the concept of pricing so important to the profitability of a company?

A) Pricing a product or service too high for the market may result in lost sales to competitors.
B) Pricing a product too low may result in lost sales due to the customer perception of lower quality.
C) Prices must adequately cover all costs for the company to show operating income.
D) All of these impact pricing and its impact on the profitability of a company.

Question 16

When implementing pricing strategies, companies should focus on

A) just the short-term pricing strategies.
B) just the long-term pricing strategies.
C) both short-term and long-term pricing strategies at the same time, but for different reasons.
D) neither short-term nor long-term pricing strategies, but average-term pricing strategies.

Question 17

Special orders are evaluated for acceptance

A) in the long-term.
B) in the short-term.
C) by only comparing the costs of the two options.
D) by only comparing the unit selling price of the special order with the regular unit selling price.

Question 18

The primary decision for special orders is determining whether

A) the lower price will cause problems with normal customers.
B) special order customers are long-term or short-term customers.
C) all relevant costs can be adequately identified for decision-making.
D) the differential revenue is greater than the differential costs associated with the order.

Question 19

In considering a special order in the short-run, managers can typically make a decision after comparing

A) contribution margins of the two options since fixed costs remain fixed in the short-run.
B) unit variable costs of the two options since these are the only costs that vary between the two options.
C) fixed costs of the two options since these costs remain constant with the two options.
D)operating incomes since fixed costs will change in the short-run, but remain constant in the long-run.

Question 20

In a special-order scenario, if a company would need to expand capacity in order to fulfill a special order, then selection of whether to accept the special order should be based on

A) contribution margins of the two options since the fixed costs will not change.
B) operating incomes since fixed costs will change.
C) the amount of additional fixed costs to be incurred for the special order.
D) the variable costs of the special order incurred since only variable costs change.

Question 21

A company should

A) not accept a special order for its product for less than its regular unit selling price.
B) not accept a special order if it must incur additional fixed costs.
C) determine if the differential revenues are greater than the differential costs in order to accept the special order, even if the special-order price is lower than its regular unit selling price.
D) always exclude fixed costs in determining whether to accept or reject a special order since they are not relevant and do not change.

Question 22

Gadgets Inc. produces a product which has a unit variable cost of $12 and a unit fixed cost of $8. The company currently sells its products to customers at a unit selling price of $40. A regional wholesaler has offered to purchase 1,000 units of Gadgets' product at a unit selling price of $20. Due to the current economic situation, Gadgets has sufficient capacity to produce and sell the special-order units without incurring additional fixed costs. Should this Gadgets Inc. accept or reject this special order and why?

A) Reject because the special-order price is only half of the original unit selling price.
B) Reject because the special-order price is the same as the total unit cost to produce.
C) Accept even though the selling price per unit equals the total cost per unit.
D) Accept because the contribution margin per unit to be recognized will be $8.

Question 23

Maxim Company produces a designer wall clock which has a unit variable cost of $15 and a unit fixed cost of $9. The company currently sells its products to customers at a unit selling price of $50. A regional company has offered to purchase 500 of Maxim's clocks at a unit selling price of $24 but would like to have the clocks customized with its company logo. The customization will cost an additional $5 per clock. Due to the current economic situation, Maxim has sufficient excess capacity to produce and sell the special-order units without incurring additional fixed costs. Should this Maxim accept or reject this special order and why?

A) Reject because the special-order price is less than the normal unit selling price.
B) Reject because the special-order price is the same as the total unit cost to produce.
C) Reject because the total per unit cost to produce the special-order exceeds the special-order unit selling price.
D) Accept because the differential revenue exceeds the differential costs.

Question 24

Which of the following statements is correct if a company accepts a special order without having to add capacity or affecting current sales?

A) Operating income will not be impacted.
B) Operating income will decrease if the special-order unit selling price is less than the total unit cost.
C) Operating income will increase if the special-order unit selling price is greater than the unit variable cost.
D) Fixed costs will increase.

Question 25

Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units: A wholesale outlet has offered to purchase 200 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at only 80% capacity?

A) $720
B) $870
C) $950
D) $1,300

Question 26

Palm Furniture manufactures outdoor patio sets with the following unit selling price and unit costs at capacity of 5,000 units: A wholesale outlet has offered to purchase 300 outdoor patio sets but is not willing to pay the retail price of $1,300. What is the lowest price that Palm Furniture should accept if it is currently operating at full capacity and is unable to add additional capacity?

A) $720
B) $870
C) $950
D) $1,300

Question 27

Canine Creations produces treats for dogs called "bark-bites." It currently sells the treats nationally at a price of $15 per bag, with a unit variable cost of $4 and total fixed costs of $2,200 per month. A local organic pet store has requested a special order of 250 "bark-bites" treat bags but would like them to be gluten-free. The flour that would be required to make the special-order treats would add an additional $1 to each bag of treats. Since the company is currently operating at full capacity, it would have to add production capacity which would add $500 to the current fixed costs. What is the minimum special-order price that Canine Creations would be willing to accept for a bag of "bark-bites?"

A) $5.00
B) $7.00
C) $13.80
D) $15.00

Question 28

If a company has the opportunity for a special order, but is currently operating at full capacity and is unable to add additional production capacity to fulfill the special order,

A) the company should reject the special-order request.
B) the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit variable costs.
C) the company should accept the special order if the company requesting the special order is willing to pay the current unit selling price.
D) the company should accept the special order if the company requesting the special order is willing to at least offer a unit selling price that covers the unit fixed costs.

Question 29

Winters Company is considering accepting a special order. Based on 10,000 units, the following costs are incurred by Winters: direct materials of $5, direct labor of $10, variable overhead of $8, and fixed overhead of $6. The wholesaler requesting the special order wants to only pay $25 for 2,000 units when the normal retail unit selling price is $50. If Winters accepts the special order, assuming it has sufficient capacity to fill the order, what amount of differential operating income (loss) would it recognize?

A) ($6,000)
B) $4,000
C) $20,000
D) $24,000

Question 30

The "plus" in the cost-plus pricing method represents the

A) fixed cost per unit.
B) selling and administrative cost per unit.
C) markup or profit per unit.
D) overhead cost per unit.

Question 31

The cost-plus method for pricing is a(n)

A) cost-based method.
B) market-based method.
C) Income-based method.
D) price-based method.

Question 32

The cost-plus method for pricing a company's products is used in markets where

A) products are not differentiated from those of competitors.
B) products are differentiated from those of competitors.
C) competition is high, with no one producer dictating the price.
D) price takers prevail in setting prices.

Question 33

In applying the cost-plus method of pricing, full cost refers to

A) product cost.
B) both variable production and variable selling and administrative costs.
C) total production and selling and administrative costs.
D) total fixed production and selling and administrative costs.

Question 34

Which of the following statements is correct regarding pricing for a company's product or service?

A) Decision-makers must be very inflexible in making and managing prices.
B) Selling goods/services involve a value proposition offer which is usually perceived the same way by the company offering them and the customers buying them.
C) Price calculations are the end point, not the starting point.
D) Companies must be flexible in making and managing prices.

Question 35

In setting a target profit, companies set the target rate of return

A) using the same bases.
B) to cover only internal benchmarks.
C) to cover only external benchmarks.
D) to cover both internal and external benchmarks.

Question 36

Synergy Technologies produces wireless keyboards for computers. The costs associated with production of 10,000 units are variable costs of $80,000 and fixed costs of $30,000. The budgeted operating income at 10,000 units is $200,000. What is the expected unit selling price if Synergy uses a cost-plus method based on full cost?

A) $11.00
B) $20.00
C) $28.00
D) $31.00

Question 37

Sansom Industries manufactures car radios to be installed in Ford automobiles. The unit variable cost is $25 and the unit fixed cost is $7. The desired return on investment (ROI) per unit is $8. What is the markup percentage that Sansom Industries uses to determine the price for each radio produced using a cost-plus pricing method?

A) 15%
B) 20%
C) 25%
D) 32%

Question 38

Massano Motors expects to produce 10,000 motors during the upcoming year. It has budgeted for the following: net income of $200,000; variable costs of $500,000; and fixed costs of $300,000. The company has invested assets of $1,000,000 and a budgeted return on investment (ROI) of 20%. What is the budgeted markup percentage used in pricing each motor using a cost-plus method of pricing?

A) 15%
B) 20%
C) 25%
D) 30%

Question 39

Nguyen Corporation has collected the following data concerning one of its products: What is the return on investment (ROI) percentage for Nguyen Corporation for its product?

A) 20.0%
B) 22.5%
C) 25.0%
D) 30.0%

Question 40

When using the cost-plus pricing method, if the actual units produced and sold differ from expected when the unit selling price was set, which per unit amount will remain the same?

A) Total unit cost
B) Fixed cost
C) Variable cost
D) Return on investment (ROI) per unit

Question 41

When the actual units sold are lower than what was used to set the original price, why should the unit selling price be increased?

A) Unit variable cost and fixed cost increase because of fewer units.
B) Unit fixed cost and desired ROI per unit increase because of fewer units.
C) Unit variable cost and desired ROI per unit decrease because of fewer units.
D) Only unit fixed cost increases because of fewer units.

Question 42

The unit selling price is computed in the cost-plus method for pricing as

A) fixed cost per unit + desired ROI per unit
B) variable cost per unit + desired ROI per unit.
C) variable overhead cost per unit + fixed overhead cost per unit + desired ROI per unit.
D) variable cost per unit + fixed cost per unit + ROI per unit.

Question 43

In the cost-plus method of pricing, a markup percentage is computed by dividing the per unit return on investment (ROI) by the

A) variable cost per unit.
B) fixed cost per unit.
C) total manufacturing overhead cost per unit.
D) total cost per unit.

Question 44

Ixtapa Company. has determined the following per unit amounts: The unit selling price using the cost-plus method is

A) $142
B) $162
C) $215
D) $227

Question 45

Target costing for target pricing

A) starts with the price and then subtracts the plus, or markup, to determine the target cost per unit.
B) starts with the cost per unit and adds the plus, or markup, to determine the unit selling price.
C) is used for products and services where a competitive market does not exist.
D) is used when products are unique in nature and firms can influence price-setting.

Question 46

The formula used to compute a Target Cost per Unit is

A) Target price per unit + Budgeted profit per unit.
B) Full cost per unit + Unit markup on cost.
C) Target price per unit - Budgeted profit per unit.
D) Full cost per unit - Unit markup on cost.

Question 47

If the existing unit cost is above a target cost per unit, then

A) the unit selling price is adjusted upward to cover the unit cost.
B) cost analysis is performed to identify which components of the product/service can be targeted for cost reduction.
C) the company should not manufacture and sell this particular product/service.
D) the company should recompute the cost per unit only using the variable unit costs.

Question 48

In a competitive market, where target costing is used, the price per unit is established by

A) management.
B) the marketplace.
C) sales representatives.
D) managerial accountants.

Question 49

In a target costing pricing approach, the desired profit per unit is

A) added to the total cost per unit.
B) added to the variable cost per unit.
C) deducted from the market selling price per unit.
D) deducted from the total cost per unit.

Question 50

To achieve a target unit cost, management usually undertakes a business process called

A) breakeven analysis.
B) differential analysis.
C) capital budgeting.
D) value engineering

Question 51

Which of the following statements is not true regarding value engineering?

A) Value engineering involves communication and collaboration between people form business functions that make up the value chain.
B) The process of value engineering is simple and inexpensive.
C) A cross-functional team reviews steps in the company's value chain to identify where costs can be cut.
D) If an activity within a business process drives up the cost, then the activity can be rethought or perhaps eliminated.

Question 52

Target costing is used for products and services sold

A) in competitive markets.
B) that are unique, with distinguishing characteristics.
C) where customers lack good information on the market.
D) where specific firms can influence prices.

Question 53

Target costing for target pricing is

A) a cost-based approach.
B) a market-based approach.
C) similar to the cost-plus pricing method.
D) used where products are distinct, and companies set their own prices.

Question 54

In highly competitive markets, players are

A) price takers.
B) price makers.
C) price negotiators.
D) price leaders.

Question 55

Recently, Shasta Corporation has decided to play a more-active role in the soda beverage industry. It is aware that the current market price for a can of soda is $2.00. Shasta plans to sell 100,000 cans of soda in its first year and would like to generate an ROI of 20% on its invested assets of $600,000. Using the target costing for target pricing approach, what will Shasta's target cost per unit be?

A) $0.80
B) $1.20
C) $2.00
D) $3.20

Question 56

Revco, Inc. is using the target costing for target pricing approach for its new product. If its expected annual sales for this product are 200,000 units, its total target cost is $170,000, and its ROI is 10% on $500,000 of invested assets, what is the expected selling price per unit?

A) $0.25
B) $0.60
C) $0.85
D) $1.10

Question 57

The first step in the target costing for target pricing approach is

A) calculating a target cost per unit.
B) using the prevailing market price per unit as a price ceiling.
C) computing the budgeted profit per unit.
D) determining the total cost per unit.

Question 58

The last step in the target costing for target pricing approach is

A) calculating a target cost per unit.
B) setting the unit selling price by using the prevailing market price per unit as a price ceiling.
C) performing value engineering to achieve the target cost per unit.
D) applying cost analysis to determine which parts of the service/product cost can be targeted for reduction or control.

Question 59

If a company that has opted to use target costing for target pricing computes a unit production cost that exceeds the target unit cost, then the company should

A) not manufacture and sell the product.
B) use lower quality materials which cost less to make the product.
C) perform cost analysis and value engineering to achieve a target unit cost.
D) increase the unit selling price so that the unit target cost will increase.

Question 60

When a business charges exorbitant prices for necessities, typically in the aftermath of a natural disaster or pandemic, it is referred to as

A) predatory pricing.
B) price fixing.
C) price gouging.
D) price discrimination.

Question 61

Although formulas can be used to compute unit selling prices, which of the following is a key factor in determining product/service pricing and is very hard to measure?

A) Company supply of products
B) Customer demand for products
C) Perceived value
D) Overall state of the economy

Question 62

When one company makes a deal with another company to set a price at a given level for a product or service, which is usually higher than the equilibrium price in competitive markets, this act is called

A) price gouging.
B) price fixing.
C) predatory pricing.
D) price discrimination.

Question 63

If a company sets its product or service price too high, it might cause

A) the demand to increase for the product.
B) customers to not purchase the product.
C) supply of the product or service to decline.
D) the market share of a competitor to decrease.

Question 64

Price-dumping happens when

A) a U.S. firm unloads its products in a non-U.S. country for a significantly reduced price.
B) a smaller company sets it selling price lower than a competitor's selling price in order to enter the market or increase its market share.
C) a foreign country sells a product in a U.S. domestic market at a price substantially below the domestic market price for the same product.
D) a U.S. company imports goods from a foreign country at a higher unit price than what it can obtain from a local, domestic distributor.

Question 65

If a company sets its price too low for a product or service, or reduces its unit selling price,

A) customers may not purchase the product or service due to perceived decrease in value.
B) demand and thus, sales of the product or service will increase immediately.
C) customers will most likely not be affected by a change in the unit selling price.
D) customers will purchase the product or service immediately assuming that the unit selling price cannot decline any further.

Question 66

Which of the following pricing behaviors is considered a criminal violation under the Sherman Antitrust Act?

A) Price fixing
B) Price discrimination
C) Peak-load pricing
D) Negotiated pricing

Question 67

Price fixing happens when

A) two or more companies collude to sell a product or provide a service for price higher than what is expected in the market.
B) a company decides to set its price to match its competitor's price.
C) a company determines that in order to sell more of its product, it should lower its selling price.
D) demand exceeds supply for a company's product, and the company in turn, increases its selling price.

Question 68

Exelon charges its customers a higher rate for electricity during the day-time peak usage period than in the evening. This pricing practice is referred to as

A) price discrimination.
B) predatory pricing.
C) peak-load pricing.
D) price gouging.

Question 69

Peak-load pricing occurs when a higher price is charged as

A) demand approaches the physical limit of the capacity to produce a product or provide a service.
B) supply approaches the physical limit of the capacity to produce a product or provide a service.
C) supply of a product or service exceeds the demand for the product or service.
D) demand is less than the supply of the product or service.

Question 70

Pfizer Inc., Meridian Medical Technologies Inc., and King Pharmaceuticals LLC worked together in a 10-year period to increase the price of a single Epipen from $100 to over $600. This is an example of what pricing practice?

A) Price discrimination
B) Price fixing
C) Predatory pricing
D) Peak-load pricing

Question 71

Ford offers a special $1,000 incentive to its loyal customers to be used toward the purchase or lease of any new Ford vehicle. This is an example of

A) price discrimination.
B) price fixing.
C) predatory pricing.
D) price gouging.

Question 72

Which of the following statements is true regarding price discrimination?

A) Differential pricing due to race, religion, disability, or gender is legal.
B) Price discrimination that causes a competitive injury to another company is not illegal.
C) Price discrimination segments the market based on customers' willingness to pay.
D) A company will most likely decrease its profits by having different prices.

Question 73

Collusive pricing is the same as

A) price gouging.
B) price fixing.
C) predatory pricing.
D) price discrimination.

Question 74

Match the term with the appropriate definition.

-Equilibrium point

A) comprised of many buyers and sellers and undifferentiated products
B) have the power to influence the market price and enjoy pricing power
C) intersection of units supplied and units demanded which shows the corresponding price
D) accept the prevailing market price and sell each unit at that given market price

Question 75

Match the term with the appropriate definition.

-Price takers

A) comprised of many buyers and sellers and undifferentiated products
B) have the power to influence the market price and enjoy pricing power
C) intersection of units supplied and units demanded which shows the corresponding price
D) accept the prevailing market price and sell each unit at that given market price

Question 76

Match the term with the appropriate definition.

-Price makers

A) comprised of many buyers and sellers and undifferentiated products
B) have the power to influence the market price and enjoy pricing power
C) intersection of units supplied and units demanded which shows the corresponding price
D) accept the prevailing market price and sell each unit at that given market price

Question 77

Match the term with the appropriate definition.

-Competitive markets

A) comprised of many buyers and sellers and undifferentiated products
B) have the power to influence the market price and enjoy pricing power
C) intersection of units supplied and units demanded which shows the corresponding price
D) accept the prevailing market price and sell each unit at that given market price

Question 78

You are given the scenarios below. Select the appropriate effect based on the relationship between a product's cost, price, and profit.

-Charging too little

A) All costs are covered and volume sold is at a sustainable level
B) Only the cost of goods sold is covered, but since there is not enough gross margin to cover SG & A costs, the company will recognize a net operating loss.
C) All costs are covered for now, but the volume sold is the lowest, indicating that competitors with more reasonable pricing might drive company out of the market.

Question 79

You are given the scenarios below. Select the appropriate effect based on the relationship between a product's cost, price, and profit.

-Charging too much

A) All costs are covered and volume sold is at a sustainable level
B) Only the cost of goods sold is covered, but since there is not enough gross margin to cover SG & A costs, the company will recognize a net operating loss.
C) All costs are covered for now, but the volume sold is the lowest, indicating that competitors with more reasonable pricing might drive company out of the market.

Question 80

You are given the scenarios below. Select the appropriate effect based on the relationship between a product's cost, price, and profit.

-Charging market equilibrium

A) All costs are covered and volume sold is at a sustainable level
B) Only the cost of goods sold is covered, but since there is not enough gross margin to cover SG & A costs, the company will recognize a net operating loss.
C) All costs are covered for now, but the volume sold is the lowest, indicating that competitors with more reasonable pricing might drive company out of the market.